How Student Loan Payments Are Changing From September

Student loans are probably one of the biggest loans you’ll ever take out in your life. And student loan payments may plague you for decades after leaving university. But after a while you’ll almost forget about it because it’s automatically collected from your salary or self assessment tax return.

Student loan is a different kind of debt

Any form of debt is not ideal. But there’s a big difference between student debt and other forms of debt such as loans and credit cards. Student loans are sometimes called ‘soft debt’, as it isn’t held against you and your financial record in the same way. If you went to take out a mortgage any student debt wouldn’t be factored in. Although student loan payments may be considered as part of your expenses.

Student loans have low levels of interest and its usually fixed for extended periods of time.

Student loan payments in the UK

Across the UK the amount students pay for their university education is different. English students pay the maximum £9,250 per year for university regardless of where they study in the UK. Scottish students can study at a Scottish university for free, though students from other parts of the UK pay the full £9,250 per year.  Welsh students studying in Wales pay up to £9,000 per year. Northern Irish students who study in Northern Ireland pay just £4,530 a year.

Interest on student loans

When you went to university and took out your student loan will affect the repayment plan you are on. Millennials who started university before 2012 will be on ‘plan 1’. Those who started after 2012 will be on ‘Plan 2’, and postgraduate or doctoral students will be on ‘Plan 3’. There’s also a ‘Plan 4’ for Scottish students

The plan you’re on will affect the interest rate you pay, the rate of repayment and when you start repaying your loan. After 2012 tuition fees significantly rose which is why there are two basic plans.

What’s set to change with student loan payments?

From September this year student loan interest rates are set to rise from 4.5% to 7.3%. The change will affect former students with outstanding loans who are on Plan 2 (started after 2012) and all current students.

Interest rates for student loan payments are usually based on March’s Retail Prices Index (RPI) which measures inflation and the percentage is usually confirmed in August. With the rate of inflation at an almighty high a lot of people had expected it to rise much higher than 7.3%. But the Department of Education capped interest rates for the year to help protect graduates from too much of a rise in inflation.

What does the change in interest mean?

Those affected won’t see their monthly payments change which is one good thing. But because more interest is added it will take longer to clear off. But for most graduates the extra interest won’t be paid off anyway as student loans are wiped after 30 years anyway. And those on lower incomes will continue to pay little or nothing of the student debt throughout their working lives.

So the only people who will end up paying more are the highest earning graduates who end up clearing their student debt.

Payment thresholds for student loan payments

From 6th April 2022 when the new tax year kicked in ‘Plan 2’ repayment thresholds were frozen. The payment threshold that you need to earn before you start paying back your loans usually rises in line with average earnings. But it didn’t rise this year and instead was frozen at £27,295 until 2026/27. What this means is that university leavers will be paying back around £110 more a year than expected.

The repayment threshold for postgraduate loans (Plan 3) has also been frozen at £21,000 a year. This means many former postgraduate students will repay £87 a year more than expected. Although this figure has been frozen ever since these types of loans were introduced. This change affects all English and Welsh postgraduate student who took out a master’s loan on/ after the 1st August 2016. Or a postdoctoral loan on/ after the 1st August 2018.

As of 6th April 2022 if you’re on ‘Plan 1’ or ‘Plan 4’ repayment thresholds have increased. For ‘Plan 1’ it rises from £19,895 to £20,195 and for ‘Plan 4’ it rises from £25,000 to £25,375 a year.

Will there be more student loan payment changes?

For students starting university from September 2023 there will be a big change to the repayment plan. As opposed to debt being wiped after 30 years, this will increase to 40 years. And the interest rate will be capped at the Retail Prices Index (RPI) rate of inflation.

The repayment threshold for this new plan is set to be £25,000 until 2025/26.

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